P&G (PG) Down 12.9% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Procter & Gamble (PG). Shares have lost about 12.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is P&G due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Procter & Gamble Tops on Q3 Earnings & Sales, Hikes View

Procter & Gamble posted better-than-expected third-quarter fiscal 2022 results. The top and bottom lines not only surpassed the Zacks Consensus Estimate but also grew year over year. Results were driven by improved productivity amid cost headwinds along with the rising demand for cleaning products. Consequently, management lifted its fiscal 2022 outlook.

Q3 in Detail

Procter & Gamble’s adjusted earnings of $1.33 per share moved up 6% from core earnings of $1.26 per share in the year-ago quarter. This can be attributable to higher sales and lower outstanding shares. The figure also outpaced the Zacks Consensus Estimate of $1.28. Currency-neutral net EPS rose 10% year over year.

The company reported net sales of $19,381 million, increasing 7% year over year and surpassing the Zacks Consensus Estimate of $18,651 million. Sales growth was attributed to strength across all segments coupled with robust volume, pricing gains and a favorable mix.

On an organic basis (excluding the impacts of acquisitions, divestitures and foreign exchange), revenues improved 10%, backed by a 3% increase in the shipment volume, a 5% rise in pricing, and a 2% benefit related to positive geographic and product mix.

Net sales for the Beauty, Grooming, Fabric & Home Care, Health Care, and Baby, Feminine & Family Care segments increased 2%, 3%, 7%, 13% and 7%, respectively. All of the company’s business segments reported growth in organic sales. Organic sales for the Beauty, Grooming, Fabric & Home Care, Health Care, and Baby, Feminine & Family Care segments moved up 3%, 8%, 10%, 16% and 10%, respectively.

Margins

In the reported quarter, the gross margin contracted 400 basis points (bps) to 46.7%. Currency had a 0.2% positive impact on the gross margin. The currency-neutral gross margin declined 380 bps to 46.9%. The decline in the gross margin was mainly due to a 130-bps impact of an unfavorable mix, 410 bps of commodity cost inflation, an 80-bps increase in transportation costs, and 30 bps from product and packaging investments, and other impacts. This was partly negated by 50 bps of gross manufacturing productivity savings and 220 bps of pricing gains.

Selling, general and administrative expenses (SG&A), as a percentage of sales, declined 380 bps from the year-ago quarter to 26%. Adverse currency imapcted SG&A expenses by 0.2%. SG&A expenses declined 400 bps on a currency-neutral basis, owing to 130 bps of savings from overhead and marketing expenses, and 270 bps of cost leverage gains.

The operating margin declined 10 bps from the prior year to 20.8%. Favorable currency aided the operating margin by 0.2%. On a currency-neutral basis, the operating margin expanded 20 bps to 21.1%, driven by 170 bps of productivity cost savings.

Financials

Procter & Gamble ended the reported quarter with cash and cash equivalents of $8,526 million, long-term debt of $23,767 million, and total shareholders’ equity of $45,746 million.

The company generated an operating cash flow of $3,246 million in third-quarter fiscal 2022 and an adjusted free cash flow of $2,499 million. Adjusted free cash flow productivity was 74% in the quarter. It returned more than $3.4 billion in cash to its shareholders in the fiscal third quarter. This included $2.2 billion of dividend payouts and $1.2 billion of share buybacks.

Fiscal 2022 Guidance

Driven by the solid results, management raised its fiscal 2022 guidance. The company now anticipates all-in sales growth of 4-5%, up from the previously mentioned 3-4%. Organic sales are likely to increase 6-7%, up from the earlier stated 4-5%. Currency movements are expected to negatively impact all-in sales growth by 2%.

The company expects reported EPS to increase 6-9%, whereas the company recorded $5.50 in fiscal 2021. Core EPS for fiscal 2022 is anticipated to grow 3-6% from $5.66 earned in fiscal 2021. The earnings view takes into account unfavorable currency movements and higher costs, due to which it envisions fiscal 2022 core EPS growth to be at the low end of the guidance.

The earnings view also includes an after-tax headwind of $2.5 billion from higher commodity costs, $400 million from higher freight costs and $300 million from unfavorable currency. Commodity and freight costs are likely to hurt fiscal 2022 EPS by $1.26 per share on a combined basis. Earlier, the company predicted after-tax headwinds of $2.3 billion from higher commodity costs, $300 million from higher freight costs and $200 million from unfavorable currency. Commodity and freight costs were previously expected to hurt fiscal 2022 EPS by $1.10 per share on a combined basis.

The company continues to project a core effective tax rate of 18-19% for fiscal 2022. It still expects capital expenditure to be 4-5% of net sales in fiscal 2022. Adjusted free cash flow productivity is estimated to be 95% for fiscal 2022. The company intends to make dividend payments of more than $8 billion along with share repurchases of $10 billion in fiscal 2022.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

At this time, P&G has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, P&G has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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